Separate reports into the crises at two of Britain’s largest lenders revealed a common cause of their problems, but widely varying careers in the aftermath of the crash
In the early hours of 15 September 2008, as the US bank Lehman Brothers was collapsing, many feared the worst, and they were proved correct: markets crumbled and, in the coming days and weeks, so did some 30 banks around the world. But few would have guessed that, five years on, the fallout from that crisis would still be front-page news.
Last week, two reports into two banks that fared very differently after the crisis – Barclays and HBOS – were published, shedding light once more on a furious fight for survival in the dark days of 2008. Barclays succeeded and HBOS failed spectacularly.
What both banks had in common was that their problems were rooted in the phenomenal race for growth during the go-go years of the early 2000s. The traditional caution of bankers was thrown aside and a dash for expansion, fuelled by lending and financial engineering, took hold. Barclays moved into tax avoidance – its structured capital markets division generated more than £1bn in revenue in the four years to 2010 – and failed to stop its traders rigging the Libor interest rate, which eventually resulted in a £290m fine.
The two reports could not be more different. The 244 pages detailing the cultural crisis inside Barclays were commissioned by the bank itself, as a demonstration of its determination to clean up its act. It employed a lawyer – City grandee Anthony Salz, a director of the Scott Trust, which owns the Observer – to investigate how and why standards had hit rock bottom. Salz interviewed 600 individuals in nine months, although none is quoted even anonymously in the analysis.
On its way to making 34 recommendations, the report concludes that the bank overpaid its staff, chased an ambition to become a top five player at all cost and failed to make its 140,000 staff understand they worked for the same organisation. Barclays’ new chairman, Sir David Walker, who is writing a cheque for £17m to cover the costs of the review, described its contents as “uncomfortable reading at times”.
In contrast, the 96 pages on HBOS produced by the parliamentary commission on banking standards, whose members include MPs and peers and the new archbishop of Canterbury, was an excoriating attack on the incompetence of the three men at the bank’s helm. It pulled no punches and called for City regulators to conduct an investigation into whether the three – long-standing chairman Lord Stevenson, and chief executives Sir James Crosby and Andy Hornby – should be banned from the City for life. None has commented on the scathing attack on their “toxic” mistakes. Just how much the HBOS report has cost the taxpayer is unclear, but it will be a fraction of the Barclays bill.
HBOS did not survive the Lehman fallout: within three days it had been rescued by Lloyds TSB. A month later, it was bailed out with £20bn of taxpayers’ cash. Barclays did scrape through, but only by going cap in hand to Middle Eastern investors; the circumstances of that venture are now being investigated by the Serious Fraud Office. Salz describes this desperate battle to avoid a bailout as making Barclays look “too clever by half”, damaging its relationship with overstretched regulators and its own investors.
While HBOS was being rescued, Barclays was still chasing growth, snapping up the Wall Street operations of the collapsed Lehman Brothers – a move that Salz said added to the management challenges facing a bank that was already stretched.
Stories had circulated for years about splits inside Barclays. The high street tellers felt no link to Bob Diamond’s casino operations, which the report said had a win-at-all-costs attitude that came to dominate the organisation. Diamond’s chief operating officer, Paul Idzik, was infamous for his behaviour, which included cutting off people’s ties and snapping pens that did not bear the company logo.
But the Salz report shows the retail bank was not blameless either. Salz details a culture of fear that pervaded the division when it was run by the Dutchman Frits Seegers, who left suddenly in 2009. Sales targets were tough, and staff incentivised to push loans with profitable payment protection insurance (PPI) attached.
Diamond and Seegers were put in charge of the two big businesses inside Barclays by the then chief executive John Varley, who failed to prevent them running the two divisions as separate silos. Salz said that while this was not Varley’s intention, he had failed to create a “cohesive” top team.
Barclays’s new boss, Antony Jenkins, who is trying to reinvent the bank, is not entirely spared criticism either. It is not levelled directly at him, but Jenkins ran the Barclaycard operation that sold millions of pounds of useless PPI to cardholders.
At HBOS, there was no hope of surviving the Lehman fallout. In fact, the parliamentary report makes it clear that it would have gone bust even if there had been no financial crisis because of the £47bn of losses racked up in just three of its divisions.
Only one person – Peter Cummings, who ran the HBOS corporate lending arm – has so far faced any official sanction. At Barclays, the SFO continues to investigate former and current executives. But at HBOS, the chances of action seem slim. Crosby quit as an adviser to private equity group Bridgepoint after the report was published and is under pressure to relinquish his seat on the board at caterer Compass. Hornby has a top job at bookmaker Coral and Stevenson continues to hold directorships at the Tate and Glyndebourne. A three-year rule makes it difficult for City regulators to take any action against the trio.
In addition, the Financial Services Authority closed its enforcement investigation last year when Cummings was fined – even though it is yet to publish its own report into the catastrophe.
The Tory position on social equity, personified by the words of George Osborne, only adds to division
Britain needs an urgent debate about fairness – the responsibilities we all have to the wider society we live in, and to the taxpayer. Last week saw examples of extraordinary duplicity and criminal irresponsibility from both the upper and lower echelons of society.
Britain’s most infamous benefits claimant, Mick Philpott, was jailed for life for the death of six of his 17 children in a fire he started. The case prompted a sometimes unedifying debate about the part played by our welfare system in the appalling events, amid claims that taxpayers had funded the chaotic lifestyles that nurtured tragedy. Meanwhile, a parliamentary inquiry into HBOS and a special report into Barclays commissioned by the bank itself exposed cavalier irresponsibility with others’ savings in the quest for personal gain, with the taxpayer directly or indirectly picking up the pieces once disaster struck.
But instead of national conversations about encouraging fairness and responsibility at both the top and bottom of society, there has been a single-minded focus on the failings of those on the lower rungs of the ladder, often reinforced by an unwillingness to correct widespread misconceptions about the true levels of welfare payments. Philpott has become part of an unpleasant syllogism, shamelessly created by the beleaguered chancellor, George Osborne, in his efforts to portray the coalition’s welfare “reforms” as grounded in morality and fairness.
Philpott, runs the argument, was party to the manslaughter of his children. He was also a benefit claimant who bred children as sources of income provided by an unreformed welfare state. Therefore, both the benefit system and its claimants are as morally corrupt as Philpott and the coalition’s decision to reshape welfare, notably capping claimants’ income at £26,000, is wise and in tune with the people’s instincts.
The best that can be said about Mr Osborne’s position, supported by the prime minister, is that he expresses a very partial truth supported by a moral position on fairness that is selective and discriminatory in its application. The worst is that it is a mendacious stigmatisation of a system that is all that stands between the majority of claimants and destitution. Yet to win this argument, defenders of the very principle of welfare, social security and the social contract that stands behind them have to ensure that what they are defending corresponds to fairness, thus revealing the mendacity and cruelty of Osborne’s position. This they have failed to do, not least because the system has been allowed to drift too far away from fairness principles.
For the Tories strike a popular chord when they say they want an end to the something-for-nothing society and that welfare as it is currently organised rewards Philpott-style irresponsibility. One of the principles of fairness is that there should be a proportional relationship between what one contributes and what one gets back. This is an elemental human instinct, which Osborne invokes, and which the current welfare system insufficiently respects. William Beveridge, the architect of the welfare state, wanted to defend it from Osborne-type attacks by insisting it be based on the contribution principle. It would genuinely be a collective insurance system, with insurance premiums leading to proportional benefits – one’s pension, unemployment and sickness benefits.
But successive governments have failed to earmark national insurance contributions for a dedicated fund that will pay out to beneficiaries on the basis of how much they have paid in. Instead, contributions have been treated as if they are income tax payments. This means that all benefits are funded out of general revenues at the discretion of the government of the day. How welfare is paid for has become a technical matter.
Indeed, Mr Osborne has investigated whether there is a case for merging tax and national insurance. But benefits that are part of a social insurance system that represents a social contract are not the same as benefits paid for from general taxation. The charge against the Conservatives is that they have no interest in expressing fairness as part of a social contract. Rather, they want a minimal system that addresses only acute need that they judge to be deserving, funded by taxation and at the discretion of politicians and officials.
This lack of concern with fairness extends to how we address the role of luck in our lives. If someone has an accident, people understand that it is fair to lend a helping hand. Philpott’s children did nothing to deserve the fate of having him as their father. Indeed, no child has done anything to deserve living in a disadvantaged family. This is why society tries to relieve their circumstances by giving their parents the cash to feed, clothe and house them and why it tries to ensure they are properly parented and educated.
This is a cardinal fairness principle. The policy of capping total payments to families, and reducing their housing benefit if they are alleged to have too much space in their homes, in effect penalises children for the bad luck of being born to the wrong parents. Yes, Philpott abused the system, but we should not distort the life chances of hundreds of thousands of other disadvantaged children for one case.
Fairness principles are indivisible: the same must apply at the top of our society as it does at the bottom. HBOS was an insolvent bank and, as the parliamentary report makes clear, was managed disgracefully in the run-up to its collapse and takeover by Lloyds Bank, which in turn only survived because of a huge capital injection by the taxpayer. It is crystal clear that in the years before 2008, banks in general, and HBOS and RBS in particular, ran themselves with too little capital in order to maximise profits and bonuses. They were bailed out by the state providing both capital and more than £1tn of extra liquidity. How bankers are paid and how they run their banks have as profound an impact on society – and taxpayers – as the welfare system.
Yet Mr Osborne, the self-appointed champion of fairness, has fought tooth and nail against the European parliament’s proposal to limit bankers’ bonuses to twice their salaries. The proposal to ringfence commercial and investment banking, and raise banks’ capital, will only be implemented in 2019, while public services are taking significant cuts now. The executives at the helm of HBOS whose actions cost billions of pounds directly – and indirectly contributed to our five-year recession – have suffered little more than reproach and personal embarrassment. More widely, 300,000 individuals with incomes over £150,000 are to enjoy a reduction in income tax from this weekend.
This is not a moment for a witch-hunt over welfare abusers. Rather, we need a proper argument about whether British society as a whole is fair. It is not one that Mr Osborne, or his policies, would win.
Posted by sysadmin | Posted on 04-04-2013
Category : Business
Tags: benefit, bitcoin, bubble, financial sector, guardian, hacker, money, people, today
Despite the hype, Bitcoin is used by very few people. It is not a legitimate currency just because it had a bubble
An obscure digital currency – used mostly for running drugs and laundering money for dictators – suffered a sudden crash on Wednesday, causing a minor sensation mostly among financial journalists and pundits.
Bitcoin is a currency created years ago by an obscure hacker in the spirit of subversion, to trade goods while dodging the gimlet eye of financial regulators. While theoretically it can be used for respectable online purchases, it is too complicated to buy and maintain for people who aren’t online 18 hours a day, so it is used primarily to fuel a shadow economy of vice. It has boomed in value. You can barely throw a rock without finding some pundit opining on how “Bitcoin is the new gold” or how Bitcoin will undercut the modern financial system. Maybe someday, but no time soon.
Bitcoin doesn’t work like other currencies. For one thing, it’s less like a currency, which are theoretically infinite in number, and more like a commodity, which are limited. No one will print more Bitcoins, for instance. There are currently 10.8m and they’ll cap out in 2140. A network of tech-savvy programmers – okay, call them hackers – work on secret algorithms to create and release Bitcoins at their own discretion. Bitcoins are anonymously bought and traded. They have no regulator and no accountability. They’re designed to be the favored by people who want to do things on the internet without getting caught.
They’re also not easy to obtain. In a piece for the Guardian last month, Arwa Mahdawi explained how bitcoins work:
“If you want to buy Bitcoins you simply go to an online exchange service such as Bitinstant and convert your local currency into the virtual money. These are then stored in a ‘wallet,’ which functions as a sort of online bank account. You can then go and spend these anywhere that takes Bitcoins to buy anything from socks to drugs.”
This doesn’t sound very special, and it isn’t, except that Bitcoin had the fortune to create a mini-crisis. Bitwallet, the online bank account service for bitcoins, was hacked today. Even though this seemed to spur a crash in bitcoins – they went from a high of $147 to a low of $108 today – this hacking may prove to be a benefit. A crash has done untold benefit to ramp up Bitcoin’s reputation. A crash means that Bitcoin has finally arrived. Now it is just like respectable currencies.
For a financial punditocracy starved by years without a proper bubble to bemoan, Bitcoin’s timing was impeccable if the goal was to look important. A month ago, Bitcoin was worth a modest $32 a share. When Cyprus started suffering its financial crisis, the ample riches sitting in the country for money-laundering purposes found their way to Bitcoin, according to a theory by ConvergEx strategist Nicholas Colas.
There are still only around $800m of Bitcoins in circulation, a tiny amount in a world economy that moves in trillions, and nothing like any serious currency. It is Bitcoin’s sudden, enormous increase in value makes it worthy of attention. Bitcoin is a bubble. It can ask for no better advertisement to be taken seriously. Paradoxically, the path to legitimacy is paved by hype.
There is ample commentary to this effect. Alan Safahi, the CEO of a cash payment processor that deals with Bitcoins, lamented that the currency is in a “bubble”. Art Cashin, a grizzled veteran of the New York Stock Exchange trading floor, just compared Bitcoin to the infamous Dutch tulip bubble, one of the standard comparisons for any serious modern financial crisis. From tech stocks to mortgage-backed securities, the tulip-bubble comparison is the language of financial crisis.
Bitcoin, known to very few people, used by very few people, is now in heady company, taking its place alongside other once-afflicted currencies like the Russian ruble or the Argentinian peso. Bitcoin, while it was functioning quietly, was boring. Now that it’s crashing, it has taken on an air of tragic glamor.
Is it only matter of time before we find out about sub-prime Bitcoin lending or Bitcoin consumer abuses? Features will abound on poverty and Bitcoin, how Bitcoin oppresses inner-city development, and how Bitcoin will raise food prices. Senate investigations into Bitcoin will follow. Hacker heads will surely roll.
Of course, in a rational world, none of that will be written, except perhaps as satire. Bitcoin’s crash is less of a currency crisis than an opportune moment for internet wisecracks. Kevin Roose, a New York Magazine journalist who says he bought one Bitcoin at $133, jokingly lamented his impending bankruptcy.
Nothing like a Bitcoin crash to teach you who your real friends are.
— Kevin Roose (@kevinroose) April 3, 2013
The best comment of the day was also the one that put Bitcoin in its proper place: as an internet meme. “Bitcoin,” opined journalist Micheline Maynard today, “is the Harlem Shake of currency.”
